雅各布工程 (J) 2011 Q1 法說會逐字稿

Good morning and welcome to the Jacobs First Quarter 2011 results Conference Call.

All participants will be in listen only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions.

Please note this call is being recorded.

I would now like to turn the conference over to Patty Bruner.

Please go ahead, ma'am.

Thank you.

The Company requests that we point out that any statements that the Company makes today that are not based on historical fact are forward-looking statements.

Although such statements are based on management's current estimates and expectations and currently available competitive financial and economic data, forward-looking statements are inherently uncertain and involve risks and uncertainties that could cause actual results of the Company to differ materially from what may be inferred from the forward-looking statements.

For a description of some of the factors which may occur that could cause or contribute to such differences, the Company requests that you read its most recent earnings release and its annual report on form 10-K for the period ended October 1, 2010, including Item 1A, Risk Factors; Item 3, Legal Proceedings; and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations Contained Therein for a description of our business, legal proceedings, and other information that describes the factors that could cause actual results to differ from such forward-looking statements.

The Company undertakes no obligation to release publicly any revisions or updates to any forward-looking statements whether as a result of new information, future events or otherwise.

And now I'd like to turn the call over to John Prosser, CFO of Jacobs to discuss the quarterly results.

Thank you, Patty.

I will go through the financial highlights for the quarter and then I'll turn it over to Craig Martin, our CEO, for the overview of the business strategies and the results of the quarter.

If you go to slide four, this is the summary of the quarter.

Earnings per share were $0.52.

Net earnings of $65.8 million.

These results include a cost of $5.5 million after-tax or $0.04 related to acquisition costs that we incurred during the quarter.

Backlog ended--We ended the quarter with a backlog of $13 billion.

Our balance sheet continues strong, net cash was actually up from last quarter at $957 million, and as we had in our press release earlier, we are raising our guidance for the year to a range of $2.40 to $2.85 and this increase includes the effects of the Aker Solutions acquisition that we have previously announced that we hope to close here in the next week or two.

Moving on to slide five, this gives the -- tracks the 10 year history of our earnings.

I think the important thing is looking at the bars underneath the graph.

If you look at the annual 10 year-- or the 10 year compounded annual growth rate, we continue to be able to meet the target that we've put on ourselves of a 15% earnings growth rate and even through 2011 with the last couple years being more difficult through the recession, we still are showing a over 16% compounded growth rate.

Moving on to slide six, and I'm going to spend a little bit more time on this slide because we did make some adjustments in backlog this quarter.

As I said earlier, the backlog finished at $13 billion.

This was down slightly from the prior quarter where it was $13.2 billion.

But during the quarter, one client informed us that they were going to do some of the procurement of pass through costs on a direct basis and so took that out of our scope, so we reduced backlog by about $450 million.

It's important to note that these are just pass-through costs so the margin related to the activity of doing the procurement will still be going through our books as we assist our client in doing the procurement but the pass-throughs will just be removed and won't be through revenues.

The more important figure, and as we've been talking for a few quarters, is that the professional services backlog increased nicely.

It went up to and finished the quarter at $7.9 billion compared to $7.6 billion last quarter, so we're seeing a nice pick up in activity on the professional services side of the business and as we have talked about in the past, that really is the precursor for a broader range of activity going forward as the professional services design and turns into construction and a number of our business groups.

With that, I will turn the call over to Craig to give a review of the quarter.

Thank you, John.

Good morning, everyone.

I'm going to take a few minutes to talk about our strategies for growth and also to update you a little bit on some of our acquisition activity in the last quarter.

I'm going to spend some time on our business model but not so much.

I think most of you have heard that before.

I'll touch on it briefly on the next slide but then we'll move on.

I'm going to talk about selective market diversity as well and I'll take time in that section to talk a little bit about what we see going on in the markets.

We're going to go ahead and talk about our growth strategy, and I'll discuss our multi-domestic strategy as part of my discussion about the Aker Solutions P&C acquisition.

I'm not going to spend any time on driving down costs continuously.

I think we've told you many times how important this is to our business and how effective we think we are at it in general, but it's always a challenge to get your margins up and your costs down in difficult markets like this one.

And then I'm going to talk about the Aker acquisition in some detail but we made several other acquisitions that closed during the quarter and I'll mention those briefly as we go through our discussion of the markets.

Turning now to slide eight.This is our conceptual framework for the industry business model and our business model.

The industry as far as we see continues to be very event-driven.

So the industry is focused on transactional projects, big lump-sum turnkey projects, big events in far away places.

A lot of that comes from the history of our industry because a lot of the businesses that started out in our industry started out with that kind of focus and have just maintained it.

Some of them are quite good at running businesses that are focused on transactional projects.

We have a little different focus and we focus entirely on preferred relationships and developing long term relationships with our clients.

I just got the repeat business data the first quarter of 2011 and our repeat business was 95.6%, so you can see that our model works very effectively to keep us in close with our clients and keep building our repeat business book.

Remember the preferred relationships come from core clients which represent a very significant part of our business.

Alliances which probably in and of themselves are 65%, 70% and preferred relationships in general which run about 80% of the business.

It is a very different business model than most of our competition and we think it continues to serve us very well.

Moving on now to slide nine, I want to take a few minutes to talk about the markets.

I'll start the top of our chart here, although there's a new market at the top that's our pharma-bio business.

The pharma-bio business is improving.

The post-merger activity is finally up.

We had a lot of consolidations in that industry.

Things are getting better.

It tends to be smaller projects and retrofits, but that actually plays well for Jacobs' skill set.

We're also seeing that emerging markets are a bigger factor in the pharma business and fortunately we're well positioned to take advantage of investments in the emerging markets by the pharma customers, particularly in India and as a result of this acquisition in China as well.

Moving on around the clock clockwise, talk about chemicals.

The chemicals business is probably the best its been in years.

There are new mid-size projects, I'd characterize them at just about everywhere.

When we look at our prospect list its actually doubled quarter-over-quarter, in multiple geographies.

The spending in specialty chemicals, polysilicon, cellulosic ethanol, on energy savings projects, environmental projects, and in some capacity creep is all pretty positive, and we see that market as strong both in the US and Northern Europe, but also increasingly strong in the developing world, particularly the Middle East and India.

Moving on now to the upstream oil and gas business, that also continues to improve everywhere for us.

Oil sands is a very good business right now, quite a bit going on.

We won more feeds in the most recent quarter.

One of these days somebody will actually let us announce one or two of those, that would be nice but expect the project may be done before they do.

But there are a lot, there's just a lot of activity in the oil sands world.

There still are some concerns about costs and I think we have to be a little bit cautious about what's in the feed stage just from the standpoint of whether or not everybody can afford all of the money that would be involved.

We're seeing a lot of activity in heavy and sour crudes everywhere, and that's not a bad thing for JE with our heavy oil background.

We're also seeing a lot of activity in the gas business.

Gas is very strong, gas processing, gas storage, so those are positives for us as well.

We're still a little weak in the oil side of the upstream business, although we have a very strong position in the CO2 flood side and we think that will be a positive force as well.

Again this is another place where the prospect quality is up significantly.

Moving on to refining.

Refining is clearly better.

It's coming from a very low base, but the refining business is up.

Our prospects are way up compared to a quarter ago.

We're seeing a lot of activity drive in smaller projects, particularly in the US and Europe.

The bigger projects tend to be in the rest of the world, the Middle East, China, India.

We're particularly well positioned I think to take advantage of growth in the refining world in India and the Middle East as well as our sort of traditional base of operations in the US and Northern Europe.

So we think refining is going to be a better business for us going forward and we see a lot of opportunity in the 12 time frame with things like greenhouse gas activity and sooner or later MARPOL VI will show up and both of those will generate many, many projects, some of considerable size but a lot of work will be right in our sweet spot.

Moving to the bottom of our pie chart, what we call other.

That's power, pulp and paper, high-tech, food and consumer products, just a whole bunch of stuff.

All actually relatively good businesses right now.

The power business for us is getting increasingly robust, particularly outside the US.

Our focus is on what I would characterize as balance of plant and owners engineer work, and we've done a really good job of building a position in that business from a standing start almost.

It's still an area where we'd like to do an acquisition.

We may see one some day, but in the meantime we're doing a good job of just bootstrapping our growth and I think we'll continue to see an increasing share of the power business.

It might end up as a pie on this chart one day soon.

Pulp and paper is up.

It's probably the best market we've seen in years, a little bit better than last year which was the best market we've seen since 1996.

We think that's going to continue to be true.

Food and consumer products is also very good surprisingly.

I wouldn't have expected that market to be as robust as it is.

A lot of activity there, particularly in the area of alliances.

Several of the major consumer products companies, major food companies are out talking to companies like Jacobs about big global alliances and we have a really good footprint for addressing those things and of course a terrific track record for an alliance partner so we think that's going to be a plus for us as well.

And then on the high-tech side, a lot of support for photovoltaics, as you guys know we're pretty active in the polysilicon world but we think that's going to turn into a fair amount of photovoltaic work.

The semiconductor business is coming back for us, that's predominantly in Ireland.

And then we see a lot more activity in test facilities particularly for the automotive industry, so that others category which is I guess not trivial at 6% looks like it's going to be a pretty good one going forward.

Moving now to infrastructure.

This one is kind of a mixed bag.

The infrastructure business is not as good as we had expected it might be.

In fact, probably not as good if we thought it might be even three months ago, but it's not terrible.

The transportation business is kind of mixed and that's predominantly what we do in this category.

Highway funds are a problem but some of the other areas, aviation to a degree and rail and transit to a considerable degree are much better.

We're seeing a lot of activity in fee driven, where user fees or some other form of income besides tax money can drive CapEx.

Those projects are pretty good.

Ones that are dependent on state or federal funding are suffering right now.

So that business is not quite as good as we'd like it to be, but there's still a lot of opportunity in design build, in PPPs and private finance to drive projects.

The good news in that industry is our growing position in the water and waste-water business.

You'll recall about a year ago we bought JJG.

That business is going well for us.

We've made another small acquisition on the west coast that's providing a fairly high amount of leverage and we're starting to see some penetration in the water and wastewater business that we're really excited about.

That's another business that's driven by user fees, so the CapEx in that business tends to remain solid even when state and local taxes aren't quite holding up on the transportation side.

A mixed bag in infrastructure.

Not all bad, not all good, but one where there's still lots of opportunity to take market share.

Moving on to the buildings business, remember this is a technical buildings business for us so it's complex buildings where what's on the inside is the critical issue.

We're doing pretty well there.

The DOD has got a fairly big program mostly along the Pacific Rim along with fairly significant investments in Intel and security work.

We've got a K12 business starting to rebound so that's the schools business.

We made a small acquisition there, a company called Magellan that's really helping lever up in the K12 arena.

The mission critical buildings for our private sector customers and non-defense, non-security customers is also picking up and these are data centers and other kinds of electronics facilities.

Another good solid building business.

Our healthcare business is coming up nicely.

We seem to have gotten through most of the concern about the healthcare bill and healthcare reform and we're starting to see spending pick up there.

And then there's clearly a very significant opportunity set for Jacobs in the Middle East and we're just beginning to leverage that business, so I'm excited about where buildings business could go over the next few years.

Moving on now to national government.

I'm going to split that into two areas of discussion.

The first is our aerospace and defense business, RTD&E, research, test, development, and engineering, and SETS, scientific and engineering technical services.

As you know it's a big business for us.

We do a lot of work with the Department of Defense, the Air Force, the Army, the Navy, for NASA, and that business is a huge market.

It's a $200 billion plus market.

Some parts are stronger than others right now.

IT is particularly strong so the tech team acquisition is well-timed for us.

We have a good prospect list in the US, so that's a positive.

There are some challenges in the US, the budgets are uncertain and the new Congress is not really clear where that's going to go, and in the US we still have the issue of insourcing activities, what our president called inherently governmental functions.

Both of those represent risks and challenges of that business going forward.

On the UK side, we're seeing real openings and real opportunities in the defense business.

We made a small acquisition, Sula, in that business to help us lever up.

It's interesting that the response in the UK to government cuts is more outsourcing, not more insourcing.

There's a lesson there for our president but I don't know whether we'll get that message across any time soon.

So we actually see some pretty good opportunities for growth of our aerospace and defense business in the UK.

Moving to the other part of our national governments business which is environmental remediation, environmental management, broadly many of the sustainability activities of the Company.

The UK has maintained its budget for the nuclear clean-up at about $4.5 billion.

There's steady flow of opportunities there, no really big prospects, but a nice steady flow of opportunities that fit our business very well.

On the US market side things are steady.

There are a few good major prospects and there's lots of small stuff, so I think that business will be okay.

Overall, national governments is going to struggle to overcome some of the funding challenges and this insourcing, but I think the business will still be alright as we go forward.

So in the aggregate as you look at our business across our markets, it's a pretty good business and we're finally clearly seeing things get better.

Let me move on now to slide 10.

I want to talk just a little bit in the next three slides about the Aker deal.

We bought parts of Aker Solutions P&C business, not all of it.

The parts we bought turned out to be the majority by far of that business but we left a few things behind, mostly things that didn't fit our business model.

So there was a piece of their business fairly transactional, we didn't buy that piece.

There were a few pieces that had to do with markets that we don't serve or where US companies aren't allowed to work, we left those things behind, but we bought the majority of the P&C business.

We announced that acquisition on the 21st.

We expect it to close in the next couple weeks.

It involves about 4,500 employees.

And we like this acquisition for two or three particular reasons.

I think one of the top reasons is it puts us in the top tier of the mining and minerals business.

There really are only three players.

This was a wonderful opportunity to acquire one of those three players.

I don't believe the other two will ever be for sale or at least not in my lifetime.

So if you wanted to compete with Bechtel and Fluor, this was the opportunity to step up into that market and become a global player in mining and minerals, with a really top tier reputation.

We also got a stronger position in energy which is good.

Environmental oil and gas chemical process, a lot of the things that we have, have been enhanced by this acquisition, but I think as importantly it also expands our global footprint in places where we really want to be as a part of this growth strategy and a part of being a multi-domestic Company and I'll talk about that in a couple slides.

And then of course the company has very strong culture like ours interestingly enough with strong customer relationships and so the deal actually works very well to strengthen some of our existing relationships and bring some new ones to the equation.

Moving now to Slide 11.

On slide 11 you can just kind of see a breakdown of the business that we're buying.

Three markets really that it serves, metals and minings, a little more than half, energy environmental is about 14%, and then the remainder is chemicals and refining, some real strengths in all those businesses, so that's exciting.

The power of this thing though for a lot of reasons was the geographic distribution so if you look at the pie chart on the right you can see that we get a substantial position in Australia, China, and South America, all areas where we see not only opportunities for the minerals business but also significant opportunities to expand our work for other clients.

Many of the food service companies and consumer products companies that we're talking to about alliances are already pretty excited about the fact that we have the ability to serve them effectively in both China and South America.

Moving on now to slide 12, this is just a little more expansion on the geography discussion.

You can kind of see in the blue where we are.

You can see with, I guess they're orange dots, where we think we've got significant benefit.

In particular to the three big orange dots, Australia, China, and South America are the things that I think are very attractive from a multi-domestic point of view.

We've always had a fairly sizeable operation in Hong Kong, we had a very tiny operation in Shanghai.

We've now doubled our presence in China with this acquisition.

We had a good government and defense business in Australia, but really not the full service business that we'd like to have.

This acquisition puts us in a great position in Australia to ride a full service business.

And then of course the mining and minerals business in South America has always been important, nice position in Chile and a very nice position in Peru, plus the ability to expand to serve other customers who are investing in South America.

We have a number of customers, pharma, consumer products, food that see South America as an area for significant investment going forward.

So we think the deal brings a lot of positives to us.

We don't see any reason that it would not close.

We've got the necessary government approval, Hart-Scott-Rodino, Canadian, that sort of thing, so there's really no reason that we shouldn't see a close in the next couple weeks.

So to wrap up, I think Jacobs continues to be an attractive investment so I'm going to give you the commercial once more.

We've got a good customer driven business model.

We've diversified markets, geographies, and services and we continue to further diversify those markets.

We've got a good solid balance sheet and I believe we're going to continue to deliver on our promise of 15% average annual EPS growth for a long time to come.

And with that in mind, I will turn it back to Robert for questions.

Robert?

We will now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from Jamie Cook from Credit Suisse.

Hi, good morning.

Good morning, Jamie.

I actually would say congratulations despite what the market is doing.

A couple of questions.

One, John, I was hoping you could provide a little more clarity on what your assumptions are for Aker in terms of what you're assuming for the year, because I'm just trying to get a feel for is the raise all the acquisition because you're incrementally more positive on the markets.

And then Craig, your commentary across oil and gas was very interesting, you gave us some color on the chemical side but on the other businesses, whether it's oil sands or refining, is there any way you can put into context the level of bidding activity you see today relative to where we were in the prior peak or how we think about that technical services order growth continuing?

Any more color on that would be helpful.

Alright, John?

On the first part of the question about the Aker contribution in the guidance change and such is it was the substantial part of any consideration but you've got to remember that, that also includes the cost of the transaction and the integration and the impact on the overall.

So we've already seen a little bit of the negative impact on the first quarter but they will continue to be costs this quarter as we get through the closing and as we integrate, but -- and then you always have the effects of the purchase price allocation, so the intangibles and amortization of intangibles, so we think Aker is a very positive move on our part, but the impact for the first couple years, few years is not as strong as it will be down the road.

Okay, but net-net, it sounds like the majority of the increase all in all is more Aker versus the organic business.

That's probably fair.

We normally wouldn't be changing a lot of our just base assumptions this early in the year as we go through.

So you have to say that the primary driver for the change is the Aker deal.

That's great and Craig if you could just comment on the latter part of my question?

Sure.

Let me make a quick comment about the earlier part.

I think John's right.

I think though that one of the most positive things that comes out of the Aker deal is a higher confidence in where things are going overall.

As John pointed out there's lots of additional issues with the amortization of intangibles, with the difference between tax and book accounting for acquisition cost, with integration and transition.

So Aker doesn't contribute as much in the first part of this cycle of acquisition as it will later on but it does give us a little more confidence in our position overall in the marketplace.

Okay.

Going on to the color on the markets, the order book or I shouldn't say the order book, let me talk about the prospect list.

The prospect list in upstream oil and gas is significantly up from the prior quarter and probably I'm kind of looking at our sales guys here, maybe where it was in 2006 kind of time frame?

70% to 80% of the peak.

It's not at the peak level yet but directionally it is going in that way and so we're pretty up beat.

And that's mostly an oil sands conversation obviously because we're still mostly an oil sands player.

Okay, and what about on the refining side?

On the refining side, I'd say we're still pretty far back in the cycle but it's interesting, one of the guys said he estimated our prospect quality or number of prospects, I should say, has tripled quarter over quarter.

So we're still a long way from the peak cycle in refining.

I don't see a bunch of multi-billion dollar investments in Europe or the US, although I do see a lot of activity in the Middle East, India, perhaps even some in the Far East that will be accessible to Jacobs as we go forward, but I don't think we're anywhere near the sort of boom refining period that we saw through 2007, 2008.

That's got a ways to go, but that's runway.

But it's clear to say you're calling the turn here?

Well it sure looks that way right now.

You have to always sort of blanket all of the comments whether I'm positive or negative with it's an uncertain world out there in many, many ways, but the evidence we have suggests that the markets are improving distinctly in a number of key businesses for us and I think I characterized those in my previous comments.

Well if you're cautiously optimistic that makes everyone feel better because you guys are usually the more conservative guys out there.

And then the last question, some of your peers are commenting on the competitive environment improving or capacity tightening.

Are you seeing that yet, or is it more a function of you just don't think things will get worse type of thing?

Well I think the challenges that you see in the numbers are what we've been saying for some time.

The market clearly has been tough.

Unit margins have been bid lower and we saw some of that come home to us in this last quarter.

On the other hand, billable hours are up, and that usually is a precursor to price firming.

And I'll get off after this, how much are billable hours up, sorry?

They're up modestly in the single digit percent.

I'm not going to give you more data than that.

And that's year over year or sequentially?

Quarter over quarter.

Alright, I'll get back in queue.

I don't want to hoard, but congratulations.

Thanks, Jamie.

Thanks.

Our next question comes from Scott Levine, JPMorgan.Please go ahead.

Good morning guys.

Good morning, Scott.

Diving in on the margins a little bit, I think Craig you just mentioned the P&L reflected some competitive pressure.

I just wanted to be sure that I heard that right and then maybe if you can characterize what your expectations are there because you're down a little bit sequentially and I know there were some one off costs perhaps in the quarter, but if you can comment specifically regarding margins and maybe as the follow-on, your indication that an uptick in billable hours here sustainable should suggest margins should hold here or maybe improve a bit as you go through 2011 and beyond?

John?

Clearly the margins as Craig said are still under pressure, so we're not going so see any great rebound in those, and in fact as we've been saying there still could be softness and such in the margins even as we start picking up the hours.

The hours always lead the recovery and as we start working those off and the market starts firming, then the margins start improving after the fact.We are continuing to see a shift in mix more toward the professional services which tend to have a little bit better margins than the field services but even with that, I would say that the margins for the next few quarters still will be under pressure.

I think we still believe they aren't going to be dramatically different than what we've been seeing, but they still could be down a little bit and that.

And as we -- the first rebound will be from volume and then the margins will follow.

With it, as we bring Aker in, that mix will change the percentages a little bit too because of some of the costs that come in with that as far as the intangibles and such like that, that have a bigger impact on the margin percentages as well, so this will be one of the larger acquisitions we've done, so the impact will be a little bit more noticeable than what it would be from the smaller ones we've tended to do over the last couple of years.

Got it, and then maybe following on that last thought, John, on M&A here.

So if this is a larger deal there's more of an integration process.

You take your foot off the gas in terms of your focus on M&A in any way, shape, or form, or not; I'm guessing no.

And if you can update us on what your priorities are in terms of your M&A program at this point?

Well certainly, we are still very focused on M&A.

We think the market is still very receptive for deals.

There's opportunities out there both small deals like we talked about where Craig talked about four or five that we closed this last quarter that ranged in some very small to some that were a little bit bigger but we need to focus on the acquisitions when they are available.

Aker will take some cash out of our till, but we'll still have a significant amount of cash for doing the right deals, and with our strong balance sheet we have the ability to borrow and to do whatever deals that we think would be appropriate for us.

I think Craig mentioned a couple of the markets as went through the markets.

Certainly the upstream oil and gas business is one we've been looking at.

The government services business still seems to have opportunities.

And as we did this little deal, the water, the expansion of our water business, other infrastructure domestically but more importantly globally are still there and we still have the expectation that this next year we'll be doing the next step in the CES deal in India that we've talked about it in the past and we have an investment and that opportunity will be to take a bigger piece.

So that's more of a geographic infrastructure market but the opportunities in the Middle East continue to grow and we think that, that's -- there's some room for maybe some consolidation and diversification in that region as well.

Got it.

One last one, quickly.

Craig, you mentioned some of the markets you're more positive on.

It sounds like you were a little bit more guarded incrementally on the infrastructure market.

Could you just indicate whether that's correct perception, or if not, provide a little bit more clarity on your comments there, particularly on transportation?

I definitely am a little more guarded about infrastructure right now than I have been.

The new Congress doesn't seem as willing to push that agenda forward as I had hoped they might be, and we of course are still seeing lots of tax shortfalls in the state and local level.

So, as it relates particularly to the transportation and infrastructure, I'm probably a little more guarded than I was even a quarter ago.

Got it, thank you.

Our next question comes from Andrew Kaplowitz, Barclays Capital.Please go ahead.

Good morning.

Good morning.

So Craig, when you closed the Aker business, I know you mentioned that it's not transactional in nature and you're not going to become more transactional in nature, but I can't help but think that especially in the downstream area, it's going to strengthen your business and allow you to compete for larger EPC projects or EPCM.

Is that fair?

I mean, is that one of the reasons to acquire that business and what is the overlap in that business?

Well if you look specifically at the chemicals and refining piece of that business, it's mostly chemicals and not so much refining.

They have a strong position as a licensor for some key technologies that are pretty popular in the world right now.

So I think it does a lot towards accessing more of the chemicals market as a front end and P&C contractor.

I don't think that changes our view that we don't want to be in the transactional side of the business but there's no question that this acquisition on the chemicals side in particular gives us access to more of the market and a better position in it, so that was a plus over and above the geography and the mining and metals business as we looked at this acquisition.

I understand, and Craig, isn't the margin of this overall Aker business higher than your core business?

Forgetting all of the amortization of intangibles as we go forward, isn't the margin a bit higher?

I would say probably not.

I think you heard our friends at Fluor Daniel talk about the fact that the margins in the mining and minerals business are not as good about the margins and other business they serve and I think we'll find that to be true as well.

Remember, we're pretty fierce competitor so if they don't like the margins now they aren't going to like them at all later.

The other businesses I think probably we do have a little better margin profile with their portfolio as you look at the chemicals business and so that will be a plus from a margin point of view.

I think they do a little better than we do, and on the energy and environmental side I'd say they are about equal.

So I don't expect it to have a big impact in terms of percentage wise or gross margins as a percent of revenue than our base business does.

It will be pretty close to the same.

Got you.

Is that mining business of Aker, because it depends on whether it services or EPCM, so is it more EPCM these days because services have much higher margins as you know, so what's the mix?

It's both but it's probably more EPCM than pure services.

The good thing about it is that it is key client relationships that are very strong and a lot of the business that they do is at locations where the development program is going to last decades, so we like the shape of that business very much.

Got you.

One question on the pipeline.

New words have been sort of steadily improving over the last two quarters and so I guess as we look forward, it seems like your confidence level of backlog growth in TPS has risen.

Is that fair?

I know we'll expect some lumpiness but generally speaking as we go through the next couple quarters would you say the core business should still have nice TPS backlog growth?

I think the TPS backlog growth is likely to be good.

I'm pretty optimistic honestly -- that's an exaggeration.

I'm a little optimistic about that part of it.

I think on the field services backlog, however, we're going to continue to face a headwind.

We've got a little more of Motiva to work off and it will be a while before these EPC and EPCM projects go from fee to full service and so I think you'll see an ongoing lag in field services backlog.

That may mean net-net that total backlog doesn't show a lot of growth but I think on the professional services side, I think we're starting to see a lot of reasons to think that, that's going to get better.

Okay, thank you.

I'll get back in queue.

Our next question comes from Yuri Lynk, Canaccord Genuity.

Please go ahead.

Just a quick one back on the Aker acquisition.

Can you just highlight on the mining side what product lines Aker specializes in terms of gold, copper?

Is there any potash in there?

And can you give us an idea of who some of the -- what the client base looks like in terms of is it mostly Tier 1 mining clients or Tier 2?

I want to ask Tom Hammond to respond to that question.

Tom, lay out the due diligence on the Aker deal.

The end markets for Aker's mining business would be your base metals, copper, zinc, lead, typically found -- often times found together, precious metals, both gold and silver either directly as a gold project as a by-product for base metals, and also they have a very nice position in uranium.

The client mix are mostly names, almost entirely names that are very recognizable, BHP, RTZ, Anglo American, Vale, and in Chile in particular, Codelco obviously, which is part of the reason we were so attracted to the deal is the scale of the operations of the global mining houses very attractive to Jacobs in terms of having core client strategies.

Okay, and just a follow-up.

On the purchase price, can we assume that, that was all cash or were there some shares?

Yes, it's all cash.

We will be doing some short-term borrowings because as you can tell from the geographies, this is fairly complex organization and in some cases we'll be borrowing in local jurisdictions to do the acquisition to hedge against currency fluctuations and such.

So there will be some borrowings, some cash, but we'll still have a nice net cash position after the deal closes.

And there is no stock involved in them.

Okay.

I'll turn it over, thanks.

Our next question comes from Steven Fisher, UBS.Please go ahead.

Good morning.

Just a couple of clarifications first.

What did acquisitions add to backlog in the quarter?

Well, with the five or so that we talked about, it came in just under $100 million, mostly in the pro services side.

Tech team was probably the biggest of that group.

The others were all pretty small.

Okay, and then on the $450 million adjustment, what stage of completion is the project in that, that adjustment related to?

Well, this project still is in the front end design portion and these were the procurement activities that would go with some of the front end.

The pass through costs related to materials equipment I guess some of the subcontracting but mostly materials and engineering equipment that get ordered early on in the process, so I don't even think this is out in the field yet or if it is--

In a minor way.

It's very minor, so it's very early in the process from the part that was taken out just relates to the procurement activity, or the pass through costs of that equipment and such.

Okay, and then Craig, you mentioned things are clearly finally getting better.

In order to hit the midpoint of your guidance I think you need to ramp up to around $0.70 per quarter on average for the rest of the year.

I'm just wondering where do you see that ramp up coming from and do you think you can get there with like what we're seeing 5% to 10% sequential growth in bookings?

Well obviously we wouldn't have our guidance where we were if we didn't think we could achieve the guidance.

It's still a wide range of guidance for obvious reasons because there's still uncertainty in terms of where the markets will take us.

I think back to the basic point, yes we are more optimistic about the markets going forward and more confident about our ability to see good growth but beyond that, I'm really not going to try to give guidance within guidance.

But in terms of the Markets that would ramp up in order to get you there, can you give any just more clarity on which market?

Well yes, I think we'll see upticks in the markets that I described as positive, so refining, upstream oil and gas, chemicals, maybe a little better in pharmaceuticals, buildings should be good for us going forward.

I think infrastructure will be a little weak.

I think our other category will be another plus, and I think the national governments business will be a little bit of a mixed bag, good and bad, probably slightly good on the whole.

Okay, the same as the overall market commentary?

Yes, pretty much.

Whenever I talk about the overall markets, unfortunately they are pretty heavily colored by where we sit in the market so the two are going to tend to be together.

Okay, and just lastly, there's lots of focus on the State Of The Union and the infrastructure theme.

I'm just wondering, given that you're a little more cautious there, what do you think you'd need to hear tonight for it to be tangibly positive for the outlook?

Well anything I hear tonight I'll take with a pretty serious grain of salt because I don't know that I believe that we have the will in the government to do much of anything.

I think the partisan politics are going to be a big problem.

I would consider it positive if the President were to push for investment in infrastructure and I don't mean by that another stimulus bill.

We appreciated the last one, we did very well in the stimulus last time around.

We'd do very well if there's another stimulus, but I don't think that really addresses the fundamental challenges that our infrastructure faces and what we really need is almost an Eisenhower-like commitment to rebuilding American infrastructure, both transportation infrastructure and water and wastewater infrastructure.

I doubt that we'll see that but that's what the country really, really needs.

The more that the President's comments head in that direction, the more positive I would think that would be for the infrastructure business, but I would also tell you there's a pretty significant lag time between when the government at the federal level starts moving and when it shows up in the P&L, and so we would have to take that, even that would have to take a little time to gestate.

Okay, that's helpful.

Thanks a lot.

Our next question comes from Alex Rygiel, FBR Capital Markets.

Please go ahead.

Thank you, nice quarter gentlemen.

Craig you just mentioned something I found interesting.

You said you did really good with stimulus last go around.

Obviously you booked some stimulus revenue in 2011.

What is the outlook for revenue from stimulus projects in 2011 versus 2010?

Is it up a little bit, down a little bit?

Any chance you could quantify that as a percent of total?

I wouldn't be able to quantify it as a percent of total.

I would say that we're mostly in the work off mode for stimulus now and there's a fair chunk of work yet to be done, particularly for us in things like the big Amtrak program that we announced, but there's going to be obviously no new additions to that business to speak of, and so you have to treat it as in the long run as a declining tail.

Sure.

Could you comment on acquisition multiples out there in the marketplace whether or not they've moved at all in the last 12 to 18 months, and also comment on acquisition opportunities or interest in the federal market itself?

Well on the multiple side, things have stayed about not moved very much in the last couple quarters, so they've stayed pretty much in the same range somewhere between kind of six for construction and maintenance business is up to something like a peak of 10 for pure services businesses or somewhere in between, not every deal has the same qualities.

I think there's a lot of opportunities still out there in the marketplace.

We are aggressively continuing to look at acquisitions.

We see a number of businesses where, and I think John described most of them, where we could leverage Jacobs very effectively with good acquisitions.

I think they are for the most part in the size of the one that we just did or smaller, lots of them are smaller.

So I think there's plenty of opportunity for Jacobs to continue to add to its growth on the acquisition side, specifically to the federal business, we continue to believe the federal government is a great source of business for the long run, that there is market share to be had, so as we see opportunities augment our business on the federal side we're going to do that.

And lastly, you mentioned feed work in Canada was picking up real nicely and unfortunately, it sounds like you hadn't been able to press release a lot of that activity.

Irrespective of the press releasing of that, what did the timeline look like for those projects that are in feed right now transition into construction?

Is that in the next six months or the next two years?

I would expect the transition into detailed design in the next six months and into the field in the next nine to 12.

Thank you very much.

Our next question comes from Avi Fisher, BMO Capital Markets.Please go ahead.

Hi, good morning.

Thanks for taking my question.

Good morning.

Craig, you mentioned briefly the RDT&E and SETS side, you did bring up the inherently governmental -- or non-inherently governmental.

Can you break out a little bit more about what part of that government business is considered inherently versus non-inherently governmental, if you can?

That maybe the most difficult question to answer that I've ever heard believe it or not.

Yes, because even they don't know what it is.

That's exactly right.

Even they don't know.

For the most part what seems to be consistently addressed as an insourcing activity is procurement related functions, and so if we have a team that's doing technical evaluations and acquisition assistance, we used to have procurement people as part of our team, those procurement people are being asked to become government employees.

And that hasn't been much of an issue up to now because we've had to replace those people with a bunch of folks honestly to do the work that these new government procurement people generate, but the trend continues and we think that's going to be a little bit of a headwind in that business.

Interestingly we had a conversation earlier this week where a fairly significant number of our employees, eight or nine employees, quit, and the reason they quit is that they didn't want to be insourced, which I find kind of interesting in and of itself.

But this headwind and insourcing because it isn't clear what it is or where it stops is one of those challenges that I think we're going to face through another year or two.

Is some of the NASA work you're doing, the science related work, is that considered inherently?

I would assume that's not.

No, it's not.

The insourcing is largely honestly on the DOD side, not so much on the NASA side, so it effects our contracts where we're doing scientific and technical evaluation and acquisition services.

Okay.

So the consultants judging consultants kinds of thing?

Judging consultants, judging hardware, we do a lot of work where we help the government first specify and then select various kinds of hardware, and part of that is a procurement process and some of those people are the ones who are getting insourced.

Swinging -- just a quick other question, swinging to the margin line.

If you look historically at TPS backlog as a percent of total, it tends to trend in line with gross profit margins after excluding the pass through costs and I know we've talked about some of the weak margins and headwinds there but we're seeing a real divergence from this trend.

I'm trying to understand what's driving that.

Is that a signal of really the pricing pressures we're seeing in TPS?

Is it pricing pressures in field services?

Is it across-the-board or an unchartered territory, here?

I have to admit I haven't calculated those precise percentages and such but we are seeing continued pressure on the professional services side, and as we are going through this transition and field services are coming down and new projects aren't starting up yet, some of the fee flows and such from the field services have slowed down a little bit as well.

So there's a competitive market out there on both sides of the business and we're even seeing in some of that in the private sector which we talk about being a little less prone to it, but as but you see some of the private public partnerships and such in design builds where the pricing is a little less transparent in how you bid it, there is a little bit more competition and such.

Now we're in a good position because our costs tend to be lower than others in the industry, so what is a real stretch for some of our competitors is kind of normal business for us, but it still is putting some pressure on our overall and continued pressure on our overall margins.

Got you, and I guess historically how long does it take for pricing to lag the turn?

Because if you're talking about here is the turn, how long does it take pricing typically to lag that?

Andy, that's a tough one to call because frankly, an awful lot of that is how fast does it turn up.

So if the market turns up fast, quickly, pricing goes up very quickly.

If everybody is slowly filling up the shops we all tend to be a little nervous about that and we tend to keep the margins down longer.

So at least as I sit here today, and don't think there's enough confidence in the market that we're going to see a rapid improvement in margins.

In fact I think we might be another quarter or two in the bidding cycle before we see an improvement in margins at all.

Alright, thanks for the color.

And finally, how much has Motiva left in backlog?

Can you disclose that?

I'd have to give you same answer I give you every quarter.

We really can't go down to that detail level because our clients doesn't want us to.

But the answer would definitely be less than last quarter.

Thanks guys.

Our next question comes from John Rogers, DA Davidson.Please go ahead.

Hi, good morning.

Good morning.

In terms of the acquisition costs and the due diligence costs you broke out, are all the due diligence costs for Aker in there now or are there more coming?

Well, you expense them as you incur them.

So there's still some additional legal and ongoing costs, closing costs, transactional costs that will be incurred in this quarter.

We're also planning and working on transition plans and such, so those costs were still being incurred.

So when we talk about the net impact of Aker as we've looked at it on the guidance and such, it includes the impact of what we anticipate in all of those costs.

And John, the costs that you've incurred that you broke out, are those all related to either Aker or completed acquisitions or you've got an agreement?

Are there any deals that fell through?

First of all, we're not going to talk about deals that fell through or deals that are ongoing, so I can't very well give you a big affirmative on that because that would tell you that we didn't have any other deals that we were working on.

So I'll have to say that the costs that were incurred were primarily related to Aker and then secondarily related to the other projects, other acquisitions that were closed during the quarter and but I'll leave it at that.

Okay.

And then just lastly on Aker in terms of their backlog, is it similar to yours in the sense of how far out are multiples of revenue that it is?

Or are these mining projects in the type of work that they do, is it longer lived projects?

I'm just curious how to think about that.

I think the backlog run-off in their business will look very much like ours does.

Might even be a little shorter because they tend to do more CM and less procurement through their books essentially, historically that's been their model and so they don't have any of these longer term government contracts like we would have on that side of the business.

They could have a longer tail on them.

Okay, and it sounds as if Craig from your comments that the ratio of discrete projects to your ideal model is at least similar in the same ranges?

Well they don't have the same degree of core client focus that we have.

That's one of the things we'll bring to the equation.

So we'll increase their preferred relationships fairly significantly because they just haven't traditionally thought about the business the way we think about it.

On the other hand the actual business is very similar to ours in terms of what it reflects, transactions versus not.

They're a little more transactional than we are.

They have more discrete projects than we do, but that's very amenable to move in the way we would expect it to move.

Okay, great.

Thank you and congratulations on the quarter.

Thanks.

Our next question comes from Tahira Afzal, KeyBanc.

Please go ahead.

Good morning, gentlemen.

Good morning.

First question is in your press release you mentioned you were a little disappointed in the kickoff for the fiscal first quarter.

Could you provide a little more color where you felt that you would have done better?

It seems it's on the infrastructure side but would love to get a little more color there?

Well I think there are two things that were disappointing about the quarter from my perspective.

First, the margins were a little weaker than I wanted to see and expected to see, and so the margin pressures were a little higher and frankly, our response to those margin pressures in terms of driving down our costs, our G&A, wasn't as good as I expected.

Got it.

So we didn't achieve in the quarter the G&A performance that I would have expected us to and that we had planned to achieve, and we didn't achieve that in the face of margin pressure so the net effect was that we missed our objectives for the quarter and yours.

And so that's where my disappointment comes from.

Got it, okay.

And the second question is you've seen a couple of these procurement adjustments out of your backlog over the last couple of years.

Could you elaborate on, number one, why customers have been asking to do this themselves and going forward, are we going to start to see maybe some of the larger project work?

Are we going to start to see more of the procurement being done by the customers themselves?

I don't think there's a trend.

I think what we've seen is individual customers swing back and forth, so you'll have a customer who essentially wants the contractor to put all of that stuff on their paper and they just want to deal with one invoice and that sort of thing.

And then you'll see them swing back the other way where they have a new [broom] in procurement internally who wants all that stuff done through their SAP system and wants us to do all the procurement on their paper.

And the biggest challenge for us of course is we're completely indifferent.

Maybe we shouldn't be.

Maybe we should be arguing to keep those revenues just so the numbers look better, but the fact of the matter is since it doesn't affect the bottom line at all, we've sort of taken the position that we don't care and maybe that's made us a little more vulnerable to these swings, I don't know that, but I don't think we're seeing a trend long-term or short-term for customers taking more on their paper or less on their paper.

I'm looking at my three EVPs and they're all agreeing with me, so I think that's probably a good solid statement.

Got it, okay.

So when we look at the oil and gas pipeline on prospects that you have which you highlighted has materially grown, you would say the mix of procurement versus the rest of the mix is around the same as we saw maybe a couple of years ago?

Yes.

Thanks a lot.

But Tahira, with one caveat, they still are early in the process, so in the feed and such we may not have gotten into that yet.

That's right, but right now there's no reason for us to think that as these move into EPC or EPCM that they will be collectively significantly different than they were in the last cycle in terms of who does what.

Thank you very much, gentlemen.

That's all.

Our next question comes from Sameer Rathod, Macquarie.

Please go ahead.

Just a quick question.

What is the expected backlog contribution of the acquisition?

Well normally we don't give that kind of detail until it actually happens when we book it and we disclose it and I'm not sure I really have an accurate number right now.

Yes, they account for it a little different than we do, so once we get it on our systems and such it will be more accurate, so but they've got 4,500 people so it will be in line with kind of that range.

Remember that when we talk about backlog, there are no rules for how you measure backlog.

So some companies measure backlog including, for example, procurement they do for the customer on the customer's paper where they feel they are at risk for it.

Other companies don't include that.

We're one of those companies.

Some companies only account for backlog as scope backlog, others don't.

So you guys see all that I'm sure as you look around us and our competitors and the different ways we look at backlog.

So fundamentally at this stage, we don't know, or at least I don't know, what their backlog will look when we put it on our terms, but we'll certainly know that by the next time we talk.

Okay thanks, have a great day.

Our next question comes from Robert Conners, Stifel Nicolaus.

Please go ahead.

Good morning, how are you?

Good morning, good.

And you?

Good, good.

Just wondering how much cash Jacobs likes to keep on the books just for general working capital needs, particularly as it relates to after this acquisition?

Well historically, we really don't need a lot of net cash for operations.

We have had times when we've worked off of almost negative cash just because using lines of credit and such, but just because of the size and breadth of our organization, it would probably be tough to get under $100 million in cash just on the balance sheet just from the flow of cash that we would normally see.

So it would be somewhere in the range so it would probably be kind of the minimum cash you'd see on our balance sheet.

Okay, and then just regarding the margins in pricing.

Can you give any flavor around which end markets it's affecting more rather than others, because really when I look at oil sands CapEx, its been recovering for about a year, year and a half, so I mean, are we just starting to see some of the pricing and billable hours start to increase there or did that sort of turn before the rest?

Well, there's no question I think we said this a couple three quarters ago that the oil sands turned before much of the rest of our private sector business, so it is leading.

If you think about where margin pressures are starting to moderate, they are certainly moderating to the limited degree up there compared to the rest of the world.

But it takes -- you not only have to have the margin pressures moderate but then you got to get the work through the books before you actually see it at the gross and net margin lines, and so we're still not seeing that improvement in margins pretty much anywhere in the private sector business.

I think next quarter we'll still be under pressure for sure from a margin point of view and possibly we'll see that pressure throughout the year.

Well and even focused on Canada, the owners up there are very conscience of cost escalation, and so they are being very careful about pricing and such and are looking at -- and are much more receptive to getting some of the services done outside of Canada so that it isn't quite the price pressure that we saw in the last go around because they still have that -- the sting of the price increases they saw in both the engineering labor and field labor from that last go around.

Okay, and then just real quick, regarding Aker, the mix of TPS and FS and also where the M&A costs flow through on the P&L?

Well, the second answer is easy, it was all through the G&A line.

And the breakdown and such will have a better handle on and we'll include that when we have it in our second quarter.

So I don't think we're ready to give that right now.

Okay, thank you.

Our next question comes from Andrew Wittmann, from Baird.Please go ahead.

Good morning, just had a quick question on upstream oil and gas.

I think Craig, in your comments you talked about obviously that business is getting better, winning business.

But you said you had some concerns about costs or how that relates to how feed could turn into construction projects.

Could you just give us a little bit more color there about what you meant?

Were you talking about costs like you're wondering if there's enough capital to get all the work done, or are you talking about costs in terms of your ability to deliver projects on time and on cost?

Neither actually.

What I'm talking about is this is kind of specific to the oil sands comment, and there is between the work that under contract with us and our competition and the work that our customers suggest they are going to release, there's going to be considerable escalation of costs in Canada, again.

And our concern is -- my concern is that, that escalation could result in either cutbacks of projects or having those projects distributed over a longer period of time and that would have obviously negative implications in terms of how quickly we could earn the margin that's there to be earned.

I don't think it's a long term problem but I think it could affect '11 and '12 if our customers get scared.

Okay, great.

That clarifies it a lot.

Thank you very much.

Our next question comes from Chase Jacobson, Sterne Agee.Please go ahead.

Hi, good afternoon.

I guess it is good afternoon where you are.

Good morning from our end.

I was wondering if you could talk a little bit about the timing of the deal.

Back in November at the analyst dinner, you talked about really wanting to do an acquisition in this space but it was a little bit tough to find a deal given the limited number of competitors.

How much of this or how much of the timing of this is related to Aker's announcement of spinning off some of the businesses?

These deals take a long time to develop and we've been in and out of Aker for a long time.

Obviously we can't talk about a deal until it's a deal and so as we sit here today, we clearly have worked on this for more than just since November.

I think in our situation, it's something we've said for more than a year we wanted to do and obviously even in November we couldn't tell anybody how close we were, so that's where we sat.

Okay.

And the other thing I just wanted to ask was you talked about the South American business and clearly South America is a strong growth opportunity right now.

What gives you the confidence that you can expand the business beyond the mining and metals exposure that Aker has there, and is it just Chile and Peru or is it other areas in South America as well like Brazil?

Well, it is all or much of South America, and I base our ability to do that in that we have done that repeatedly with virtually every acquisition we've made.

We've been able to come into that acquisition on the back of whatever line of business it was in and then lever that acquisition into other Jacobs lines of businesses.

That's one of the strengths of our four client strategy.

So as a pharma customer starts to think about investment in South America, they're going to look to one, a pharma company, a design company and construction company that really knows the pharma business, that would be us.

And then they're going to say well now do you know how to deliver projections in XYZ country, and was we build our leverage in places like South America we can answer that in the affirmative and that combination is compelling.

And so that's how we end uptake in, well for example, a pharma business in Singapore because that's how we got in Singapore, and turning it into a major downstream presence in the oil and gas business.

That's how we take our oil and gas business in the Middle East and turn it into a buildings business as well.

So that's a fundamental part of our strategy is to lever off of a presence and a local knowledge through a broader spectrum of markets for our four clients.

So it sounds like it takes some time but you have the ability to do it?

Yes, it will take some time.

Certainly Brazil and some of the northern South American countries, Venezuela, Bolivia will be key factors in that, but then we have a terrific position in Chile and in Peru.

Thanks.

Our next question comes from Michael Dudas, Jefferies.

Please go ahead

In the interest of time, everything has been answered.

I know you got to get ready for the address tonight, so thank you, gentlemen.

(Laughter) Michael, it was nice to hear your voice.

You just wanted to let us know you're on the line.

You didn't want us to suffer without thinking you were here.

Our next question comes from Will Gabrielski, Gleacher.Please go ahead.

Thank you much.

Can we talk about margins again?

I'm sorry if I missed this, I had to step out for a few minutes, but maybe by segment what you're seeing?

I know that's a little granular, but I just want to understand why the decline there and then versus what you're booking right now.

Obviously I think the front end mix is shifting a little bit maybe than what you saw in '06 when you had a similar level of activity and I'm wondering if you can talk about the margin profile just based on the changing dynamics of the end markets and what the mix is in that front end backlog and what we can expect the recovery to look like over the next say four to six quarters?

Well I think as we had said earlier, the margin continues to be under pressure, pricing continues to be under pressure.

We are seeing a pick up in the hours, the volume side of our business.

That hasn't translated into any pricing increases even where the markets are a little stronger.

We aren't going to go through and we don't break down the margins by market and such like that but we would expect to see the pick up in volume come first and the margin pick up will follow and it really depends on how quickly that volume picks up to see how robust the margins come.

Right now, it's a very soft upturn, modest upturn, and so we're not seeing upward pressure in margins and so what we're booking today is at or below where we've been booking over the last few quarters.

I don't think there's any significant change.

It's one of the reasons the comments that Craig made why it's so important for us to continue to control our costs and keep our operating costs down is so that we can continue to report decent operating margin percentages even in the face of little weaker gross margin percentages, but I guess it's kind of a long winded answer for without getting exactly to your point, but that's kind of the broader picture and we're not going to go down into the granularity that you might like.

So at this point in '06, since you use that as kind of a benchmark for the last time you saw this level of activity, were margins picking up at that point and is there something structurally different that we should be thinking about that's causing margins to take longer to come back this time?

Well in '06 I don't believe margins were picking up significantly just yet.

They were about to but they hadn't really started picking up, but remember in '06 we weren't coming off the back of a major trough.

Right.

And so you didn't have the downward pressure in the margins preceding '06 that we have as we sit here today.

So I think in fact the circumstances are different between '06 and now and the resulting activity is going to be different as well.

Just to reiterate what John said we think margins will firm very slowly and that our recovery and probably the industry recovery will be lead by volume first.

Okay, so your reported margin, you just took another $450 million of what I presume would be close to zero margin dollars out of your backlog and you're talking about a lot of front end work in the oil sands and upstream, it would seem to me that the mix within your business is moving more towards front end work in general and high value front end work on big energy projects.

And I'm wondering why that's not more along with you taking that $450 million out why that wouldn't have a more positive impact why we would have such a steep decline sequentially.

Remember the decline is driven by lots of different factors, but I think what you need to recognize, we all have to keep in mind as we talk about how much better things look, there are still a lot of competitors out there whose shops are not full, and while we're in places like Canada we're hiring like crazy, that's not true for everybody with whom we compete.

So our competition is still pretty desperate in some cases and we're not about to let them take our market share, so we're prepared to get down just as desperate as they are to preserve our market position and that means margins haven't improved like you would otherwise expect.

And then I guess at your Analyst Day you laid out interesting math of course how government contracting works, we tell them it costs $2 and it costs $4 but either way we make our profit margin.

Have you seen any shift in the model at all or is there something changing structurally within federal that you see on the horizon that could --

I think the federal market is where things like the Brooks Bill are involved, the federal market is largely unchanged.

What we are seeing though is where the Brooks Bill doesn't apply, where you're seeing value based procurement, we're seeing pricing pressure on those value based procurements even in the federal sector.

So it's a mixed bag.

If you look at the state and local level, again I'm focused on infrastructure here, what you're seeing today is there's no real price competition but there are 40 bidders.

In all seriousness, 40 bidders.

And so that makes it challenging to preserve your position and it raises your costs for pursuing work.

Okay, and then I guess lastly, I don't know how granular or how close you are to some of the people in DC, but conversations that you may have had surrounding the new committee chairpeople, energy and commerce and transportation and infrastructure.

Is there any sense they might be able to work better with the administration now?

Getting republican support for ideas that are infrastructure related, possibly that Obama could support versus the constant pushback from republicans during the last Congressional period?

I'm going to turn that question to Bill Birkhofer.

He kind of heads up our government relations business as one of his evening jobs.

Bill, do you want to comment quickly?

Sure.

The issue here is whether the political equilibrium is going to come back to the center.

As it moves back to the center and we see more collaboration, then we're going to get more play on some of the issues that Craig talked about earlier.

What we've gone through in the past couple of cycles has been late appropriations, very little work on long-term authorizations, the kinds of things that will sustain our federal business interest over the longer term so I'd be hopeful that we can get back to that and honestly, I think that will mean we'll see a more orderly process this year, we'll see a budget resolution, we'll see appropriations moving back on schedule, and frankly timely authorizations as in transportation.

If we see those things, then I think the whole climate improves and that would be a change from what we've seen over the past couple cycles.

Okay, so is that your expectation or just sort of an analysis of if they did this?

No, I think that is the expectation.

It's certainly the hope, and I think to a degree the expectation.

I might put it more in the hope category than Bill does but he is a little closer to it than I am.

Well we have a country built on hope, so no worries.

I appreciate it.

Thank you.

Thank you.

We have a follow-up question from Robert Conners of Stifel Nicolaus.

Just real quick to keep beating the margin question is that last time scope gross profit margins were really robust, say about late '08, early '09 period was actually when TPS revenue as a percent of the total was actually declining.

So is this really like particularly within oil sands like we could see a surprise maybe nine to 12 months down the road when the FS portion sort of picks up or is it just too early to tell?

Well I think I've said that we think margins will start to improve in two or three quarters so I guess that does kind of fit what you've just described, and it wouldn't surprise me again there's a significant lag between when margins are bid and when they go through the books.

Remember these projects tend to run two years.

The engineering portion of the technical professional services part of it will run 12 months, and so you're going to see that work that was bid 15 months ago is just now coming off the books from an execution point of view.

And I think that's part of what you're seeing when you look back at that late '08 and early '09 time frame.

Okay, thanks.

That helps.

I am showing no further questions, so this concludes our question-and-answer session.

I would like to turn the conference back over to Craig Martin for any closing remarks.

Mr.

Martin?

Well I want to thank you all for your interest.

I think there were some great questions.

I hope you see that we are optimistic.

I hope you see that we're not wildly optimistic or anywhere close to wildly optimistic.

We think things are better.

We do think there's still a lot of uncertainty out there.

So it still remains a mixed bag but I think it's more on the positive side than not.

And with that, I think we're done.

Thank you, operator.

Operator?

Yes, sir.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect your lines.